DEAL TIME! Catalyst Access Fund Investment Opportunity

Adam Gower: Alan Donenfeld, City Vest. Such an enormous pleasure to meet you. I'm so happy. You sent me a fascinating email. Why don't you start off. Just introduce yourself. Tell me who you are, your name, company. What's your position over there and then I'm going to ask you all about City Vest.

Alan Donenfeld: Hi, Alan Donenfeld, CEO of City Vest Capital. I call about 700 funds a year. Actually, I'm looking at you here, but you're actually there. I call 700 funds a year, which I find primarily through the EDGAR SEC database.

Adam Gower: Oh OK.

Alan Donenfeld: And I find the funds that are raising capital and typically, I've looked at enough funds to realize that the Blackstone, Colony, Carlyle, Angelo Gordon - the "mega funds" underperform. There's so big that they've been able to extract one, one and a half, two percent in fees and they're happy with that and they want to just do core properties, something that, you know, is not aggressive. They don't want to lose sovereign wealth money. They want to keep their 5-10 billion dollars under management and they're happy earning their one and a half percent on that and if they exceed a 6 or an 8% pref, then great. On that much money, there's huge fees.

But otherwise, they're happy just doing about a 10% return. So the mega funds, they're not doing 15, 20% returns. But when you get down to a first or second time private equity fund manager, not a deal, but a fund - so a guy who has been, he's already done two, three, five hundred million dollars worth of "sponsored deals". He's done with CrowdStreet. Right? He doesn't want to do another CrowdStreet deal because, who wants to find the deal and say, OK, seller, wait for three months while I crowdfund the equity on CrowdStreet. As great as CrowdStreet is and as fast as they are, there's about two months that goes into that. They've got to do their due diligence. They've got to structure it.

They've got to enter into agreements. There's a period of time that CrowdStreet takes to raise the money. What seller, in this market, wants to wait two months while CrowdStreet raises their equity? None. Versus a fund that has the money in the bank that says, we'll enter into an LOI next week and we can close, you know, in a month after our due diligence. We have money in the bank. We don't have to raise it. There's nothing contingent other than the due diligence.

So, most sellers in this market want to deal with a fund, not a sponsor. Right? So, I find, even if it's an early fund, like the one that we have now, which is called "Catalyst". They do have, I don't know, 600 million dollars worth of properties that they have sponsored in the past. This one happens to be their first-time fund. I don't prefer first-time fund managers, but this one had enough of a sponsor/deal past that I felt comfortable with them.

So, I go to Catalyst  for example, and I say, OK, you're at 10 million raised for this fund. I will invest - not raise - I will invest in your fund - 5 million dollars and I see you're out with a, this is in the case of Catalyst, an 8 pref, followed by 75/25. Right? 75 for the investor. And I say to them, I want a 12 pref and I want 80 percent of profits. And they say, that's outrageous. And I say, OK, you're still going to earn your fees. Our money is still going to pay our pro-rata share of the organization expenses. You get whatever those other fees are for property management.

You know, sponsors have lots of fees that they took away. You're still going to earn all of those. I want, for my investors, a 12 percent pref followed by 80 percent of profits. And there's some other little things that, because they're real estate acquisition people, they're not the best people to even know their own fund documents. So, there's often very small technical issues in private equity fund documents that they're not even aware of. For example, there was one fund that launched in 2019. I was investing at the end of 2020. The end of a 2-year capital raise period. Right?

Some people invested in 2019. I was investing at the end of 2020. How do you, in a private equity fund, how do you bring both of us onto the same page in that same group of properties? There's something called - it's called different by different lawyers: a rebalancing contribution. An interest rate that I have to pay to bring me back to the same value when that first investor closed. I usually negotiate that rebalancing contribution down from 8 percent to 0. Meaning, in the case of that fund, I would have had to have paid 8% per year. 16% of my investment to bring me back to that first closing. I didn't have to pay it. So, there's little things that I am negotiating for our investment from our feeder fund. I'm raising capital from my crowd, into my feeder fund. Not directly invested into the underlying documents.

So, I have to assume a higher level of fiduciary responsibility that I have read those documents. I'm investing into that fund and I have negotiated a "private" side letter agreement to give me a 12 pref, to give me 80/20 split, not 75/25, to give me a 0% rebalancing contribution, to get rid of a call feature because I don't want to have to call on my crowd. I want to invest. I want to take the money and invest it. I want my pref to start accruing. I don't want to have to hear, 6 months, a year later, oh I have to put in another $500,000. I want to invest it all. That's all in my private side letter agreement, which doesn't impact any other investors investing in that private equity fund.

Adam Gower: That's fascinating. Tell me, at high level, what kind of - what are the assets you look for? Do you have any preference for the kinds of funds, for the kind of real estate assets? What are the characteristics that you look for in those 700, goodness me, 700 funds a year, you look at. That's a lot of product.

Alan Donenfeld: Right. So, everybody is looking at multifamily because the underlying theme is, everybody's got to live somewhere. And we know from Department of Commerce statistics and everybody knows that population is growing. Immigration is growing. People have to live somewhere. Millennials, kind of, have a bad deal that they haven't been able to earn enough to buy property so they're renting. They're now moving out of Brooklyn and San Francisco and they're renting in suburbs to be able to afford larger apartments in order to house their kids and family. So we know all that's true. There are unique fund managers out there in every sector, whether it's multifamily, industrial, medical properties, senior living. And it's those guys who have a unique focus in their own market. So, we did one fund investment in a company called McFarlin. They are a senior living investment fund. But, not just senior living, but "distressed" senior living, because we know, coming out of the pandemic that a lot of senior living facilities had issues. So their specific focus is, knowing the banks - the banks who have loaned money to senior living facilities and they're negotiating with banks to get special deals to manage, take over and acquire those properties at significantly discounted prices from what those facilities are even worth. Right now, we're working with a multifamily fund. Everybody likes multifamily. But, this happens to be a GP co-investment multifamily fund. So, we're earning the right to be a GP investor, which earns percentage of profits off of limited partners, so it juices the return up from maybe a 20 percent return up to as much as 30 percent, which is what our Catalyst Fund is targeting.

 

Adam Gower: Now, how do you get - one of the biggest issues that I come across and as you know, what I do is build systems for sponsors so they can raise capital from individual investors. And I know you have a strong opinion about that and I'm dying hear your opinion. I want you to share it. It's very, very valid and very strong. But let me drill down on one question then. One of the biggest issues that we have, that sponsors face is that investors typically, are more inclined to invest when they know exactly what the asset is. It's the building at the corner of walk and crosswalk. When you're investing in a fund, you don't know what you're investing in. You have to invest more directly in the sponsor, their track record, their experience and a degree of trust that is beyond just investing in an individual building - that they're going to make the right decisions going forward. It's almost blind. It's called blind funds, typically. How do you get over that issue with your investors?

 

Alan Donenfeld: I have a couple of different answers and this goes to the crux of why we exist. If you go to any other crowdfunding site, you see lots of deals. How many of those deals have audits? How many of the deals have administrators? I can answer the question. None of them. The sponsors may have never received an audit. So while it might be great that you get to see what the offering is, what is that individual property? You can analyze the spreadsheet on that property. Is that an honest, is it a good sponsor, are they audited? Do they have an administrator? Every one of our funds has a prior audit. Every one has an administrator. We, on our website have a third party due diligence report where we engage a company named Buttonwood and they do a due diligence report on various aspects of every fund manager, ranging from reading the engagement letter of the auditor, the administrator. Making sure there's a minimum amount of investment from that investment management firm into their own firm. Going through FINRA and SEC records to see if there's any adverse reports. Doing LexisNexis reports on liens, bankruptcies - anything that might be bad in their track record. Verifying that they have a certain amount of dollar and years of experience in this strategy that they're focused on. Making sure there's a key man life insurance policy. So, all of those things are verified by our third party due diligence firm. And,  regarding your point about, what is this fund investing in? Often is the case that the blind pool is not so blind. In the case of our current Catalyst fund, there's four investments already in it. The complete underwriting of the 4 deals, already in the fund, is available on our website. But beyond that, they will be buying 5-10 more properties, each of which will have an auditing, a spreadsheet and pro-forma of each of those properties. So while it is blind pool for some of the properties, I think we're in a much better position and safer position of investing in that fund than through a crowdfund where there's no audits, no administrator, no third party due diligence report.

 

Adam Gower: 700 funds a year. That's 2 a day.

 

Alan Donenfeld: A couple a day, yeah.

 

Adam Gower: That's two a day.

 

Alan Donenfeld: Yes.

 

Adam Gower: If you work weekends. So you're working very hard scanning through these things. What are the deal killers now and what are - how do you screen before you even think about sending something to Buttonwood. What kills an option for you? What are you looking for?

 

Alan Donenfeld: So, each fund must have a minimum size of 20 million dollars in the current fund and at least 100 million of prior deals that they've done. So, we want somebody who's experienced. We want to look at their track record and validate, you know, verify that they have in fact generated a high level of return. So, in the current case of Catalyst, they actually have a 35% track record on one hundred and sixty million dollars of prior transactions. So, of the 700 funds, I can rule out the first 600 that are either individual deals, small funds, funds that don't have a great track record, or there's something in the record that I've already found that rules them out. That's going to then leave 50-100 funds per year which is still a big number but at that point I can then, get their PPM, get their deck, get their limited partnership agreement. The things that are very difficult for an individual to assess. What's in that limited partnership agreement? I don't think individual investors know anything about rebalancing contributions, call features, catch-up provisions. These are highly technical that I can negotiate from our feeder fund structure. I can negotiate better terms for our investors.

 

Adam Gower: Ok. So, do you have - so at CityVest, is there just one fund? Investors invest in one fund at CityVest and then that fund then invests in your selected funds as you find them and negotiate or.....

 

Alan Donenfeld: No.

 

Adam Gower: Do you create feeders individually and your investors can choose which feeder they want to be in.

 

Alan Donenfeld: Right. So, semantic terms might be. We're not a fund to funds. We're a fund to fund. So, we are creating a feeder fund and we identify the one fund that we want to invest in. And because we're pooling 100 investors into our access fund, which we feeder fund, which we call an access fund, we're going to be about $50,000 average per investor. That ranges from $25,000 up to about $250,000 from individual investors and that pool then, represents five million. When we find that underlying fund that we want to invest in, we then negotiate better investment terms because we're going to represent five million. Even if they're a 50 million dollar fund, we're 10% of that fund. We're a significant percentage of their fund and we want better terms for our investors. So typically, a underlying fund might have an 8% pref and then 75/25 split or 80/20 split of profits. We, in almost every case have gotten a 12% pref for our feeder fund, which we pass through to our investors. In two cases, we got a 14% pref and then another one, we got a 15% so, much better terms than any individual could have gotten from that fund.

 

Adam Gower: Ok, so I do understand now. Thank you for clarifying that. So, each time you find a fund you want to invest in, you raise money specifically for that through a feeder fund. You create a feeder fund to invest directly in that. Alright.

 

Alan Donenfeld: We negotiate what those terms are for our investment in a side letter agreement, which is a private agreement between us and that fund. At that point, we will then go out and essentially raise the capital for our feeder fund in order to invest that 5 million in the underlying fund.

 

Adam Gower: Fascinating. So are you - do you find yourself, Alan, to be investor-driven or do you lead the investments? In other words, if you feel like there is a high demand from your investor pool for industrial real estate, for example, will you go out and specifically find an industrial deal or do you lead that and then advise your investors, you know what, this is where we want to invest. What leads the decision on what funds you're going to be investing in?

 

Alan Donenfeld: So, I'm driven to find the best investments. The investors are there. I sell out every fund in a matter of - in one case, it was ten days. Sometimes it takes four weeks, five weeks. But we sell out every offering. So I'm focused on - if I deliver great product to my investors, they're going to be there. So our investors, many of them have been in now, 6 and 7 different funds of ours because they like what we're doing. We're getting better terms for them. As far as, how do I select the funds, it's the best fund at the time that I can find that meet various criteria of safety, the auditor, administrator. But in almost every case, they have greater than a 20% IRR on prior transactions. A couple of cases, where at - one case, Clairmont was at 30% IRR. The current case of Catalyst, they're at a 35% IRR on their prior realized investments.

 

Adam Gower: And what are the terms? Terms as in amount of time do you look at for the life of the fund?

 

Alan Donenfeld: So, the shortest fund I think that we did was 3 years. Many of them are 5 and 6 years. As you might know, some of the funds have extension provisions. So in the Catalyst fund, it's a 5-year fund. There are three 1-year extensions. It is possible that it could go to 8 years. But, because of the very high pref that I've negotiated, that 12% pref. That's really because it's compounded and cumulative. It becomes an IRR calculation and that investment manager does not want a 12-15% return. They want to hit their 30% target. And because of that, the shorter amount of time that they can be in a various asset, the greater their capability of generating the highest possible IRR. So, we're on the same page with the manager of trying to achieve the highest possible return. Not letting this thing run for 8 years because those fees of the fund are insignificant as compared to the percentage of profits.

 

Adam Gower: I am so glad you said that. Makes me very, very happy because you did send me and we will talk about this - this fabulous challenge to the crowdfunding philosophy of investing. I am going to push back on you a little bit now with what you just said, right. One of the most onerous conditions of any partner relationship with investment, any sponsor relationship with investor is, the pref. Because the pref can eat away so hard at any returns. And what that can do is it can almost force a sponsor to sell too soon to leave money on the table. If they can see that the best interest actually would be to go longer and yet they're reacting to a 15 pref. It's like, the mind boggles right? How do you respond to that negative side of having such a generous pref from a sponsor?

 

Alan Donenfeld: No one's ever lost money by taking a profit. So, yes, maybe it would be better to have a 25% IRR over 8 years than a 30% IRR over 3 years. Right? But nonetheless, nobody's ever lost money by taking a profit. So, if the profits are there in 3 years, if they've gotten, in the case of Catalyst, they're repositioning assets from low income housing tax credit properties. They've exited this 15-year program and they're now able to reposition it as market rate apartments, getting significantly higher rents. When that happens over just a 3-year period of time, I think it's time to sell. Take your profits. Generate a 30-35% IRR. Don't worry about trying to get long-term gains. It's good to take a profit, generate the profit, distribute to investors, move on to another investment.

 

Adam Gower: Investment strategy. Do you like to look at development, value-add, stabilized, core? What do you like and what don't you like?

 

Alan Donenfeld: I don't really like core. I don't like core plus. I don't really like stabilized. They're great for insurance companies. They're great for sovereign wealth. I want to find a manager that has something extra that does the work to get the very high returns. So clearly, development has the highest risk and usually has the highest return. I find that somewhere in the middle a value-add or repositioning fund is a happy balance. It's cash-flowing properties, which lowers the risk, obviously but there's something wrong with the properties. I spoke to lots of managers that are out there. They want to see problems. They want to walk into a rental office and find that there's no air conditioning, that there's shabby furniture, that there's one person that won't get off the phone and come to the person that comes into a rental office. Those are all easy fixes. They want to see a cracked pavement when they drive into the facility because that's like the cheapest thing you can do: repave the parking lot, exterior improvements and renovations, landscaping. All very cheap renovations of properties. And a manager that knows exactly what to do in a multifamily unit to say, I know the exact stainless steel appliances to put in, the exact two-tone paint to put in, the exact kind of carpeting, countertops. They can limit the cost per unit. Sometimes it's as cheap as $2,000, $3,000 to get an extra $100 or $200 per month in rent. That's a significant return on investment and then that leads to much higher NOI and a higher sales price in 3, 5, 6 years.

 

Alan Donenfeld: Geography. Where do you - what kinds of locations do you like to look at?

 

Alan Donenfeld: Everybody's going after high-growth markets. Typically, that's a lot of western states: Denver, Phoenix, Seattle, Portland. All high-growth markets, Denver prices have gone up significantly. I'm not sure that's an easy market to find property because so many people have gone there. I do find that the southeast is still growing very nicely. Charlotte has significant growth. Orlando still growing at very fast rates. And I think those kinds of markets in the southeast - I don't want to leave out Phoenix and those kind of high-growth markets because the western states have a unique combination of rising population and rising incomes. So, you can't beat a market that has that combination: rising income and rising population. It has a significant impact on rents. So, I would say western states. Southeast Florida has excellent demographics with growth in population. It's not that I don't like Minnesota and Wisconsin. There certainly are great investments there - if a fund is there and knows that market. But generally, the high-growth states are more attractive.

 

Adam Gower: Let's talk about where the rubber hits the road. Fees, right? Fees are very important. You kind of casually mentioned that as an attractive side for sponsors of your investment. It is very important for sponsors, right? Keeps the lights on, but, some sponsors can be - you've got to be careful that you don't have a sponsor who is driven specifically by fees. What are the kinds of fees that you look for in a sponsor? It's very interesting, your business model, and what are your fees?

 

Alan Donenfeld: Sure. So the the underlying funds are typically at about one and a half percent management fee. I do try to keep them honest on the variety of other fees that they may charge, either an asset management fee or an acquisition fee. Even sometimes, they like to slip in, a capital markets fee for arranging the debt finance. So all of those, I know the standards for where those fees should be and I make sure that they're at the right level. In our side letter agreement, we may have to intercede and cap those fees to the extent that they might be uncapped in their limited partnership agreement or PPM. So, I know what those fees ought to be in our current Catalyst fund. The investment manager is not charging us any fees. All of those fees are on the underlying limited partners in each deal at the property level. And, there is a limited partner which usually is a family office, who then negotiates to manage that level of fees. Because, we have typically gotten the pref up from an 8 pref to a 12 pref which is 4% higher. CityVest fees are 1.75% per year. So, if we've gotten 4% higher in pref, that certainly accommodates our 1.75% in fees. If they only hit the pref and that's all, then that underlying investor would have received a 10 1/4% - essentially, pref after our fees, which still is much higher than the underlying funds 8 pref.

 

Adam Gower: Interesting. OK, and those are the only fees that you charge.

 

Alan Donenfeld: Yeah, there's a small organization expense reimbursement for us to set up our feeder fund structure to Delaware LLC. We engage an administrator ourselves to help us manage our money. We do have audit accounting fees for our feeder funds. So, those are paid by the entity on a yearly basis but they don't really amount to a big percentage.

 

Adam Gower: And there's no promote. You don't promote your investors.

 

Alan Donenfeld: We don't. I know of another crowdfunder that actually worked with Catalyst and they did not negotiate the 8 pref of the underlying Catalyst return. They didn't get that up to 12% on top of that. So they only provided that 8% but, in addition, they took a 10% promote on top of the promote.

 

Adam Gower: Yeah.

 

Alan Donenfeld: We don't take any promote. We're only taking that fee. We're looking out for our investor. And the whole reason CityVest got started was for my brother, who's a doctor had gotten burned, on another crowdfunded deal. And I wanted to find the best product in the market. And that's not individual deals that don't have an audit or an administrator. It's a fund with those things where I'm negotiating better investment terms. And I asked my brother, who couldn't get, by the way, all of our funds have $250,000 minimums, $500,000 minimums, some of them have a million dollar minimum subscription. So an individual investor couldn't even access this fund by me aggregating capital to be a pool of five hundred. Now we're a super investor. We're not just meeting that minimum, but we far exceed it. So for my brother's capital, we got started when I said, hey Roger, can you give me some names of some other doctors? And before I knew it, I had two million dollars. And that's how I realized we can negotiate better terms for our investor.

 

Adam Gower: Fascinating and I do want to hear about your background. I want to know who you are, Alan. In the sponsor profile - let's wrap up our conversation about the fund. A couple of questions for you. Really specific. Do you -what's your co-invest in each of these feeder funds that you put together?

 

Alan Donenfeld: Right. So CityVest does not invest in our own funds. While we require that underlying manager to invest at least 2 1/2% of his fund, or $500,000. CityVest does not invest in our own funds only because we've done 12 funds. If we're investing $100,000 each, it's over a million dollars. We would rather keep our fees low, which means we don't make a lot and pass all of those benefits on to our investor.

 

Adam Gower: So you're entirely fee based are you? You don't have any of the upside. You don't take a percent. I mean, that's extraordinary actually. I didn't realize that.

 

Alan Donenfeld: We make sure that the funds are the best that they can be. We're not dipping into the investors pocket to take a percentage of their profits. We're taking essentially, an administrative fee for managing our investment dashboard at our website so that investors can see what distributions are providing them the information from the underlying funds. They get their K-1s there. All of that information is what we manage and the payment for all of that is this 1.75% annual administrative fee.

 

Adam Gower: That's really fascinating. What an interesting structure you have. Alright. Let me ask you a couple of final questions. Unfortunately I'm not sure if I've got - I've got a whole page of more questions. So let me ask you this one, because we've got limited time and I do want to talk to you about who you are and your background and get to know you a little bit. I know everybody wants to know who you are. So let me ask you this - one last question about the fund. And I love asking this question. As you clearly, forgive me for being so frank, can remember the days of radio before internet killed the radio with podcasts. If you came into a radio show, you had to listen to it from when it was broadcast all the way through to the end. But in a podcast, you can listen any time you like. But imagining this was a radio show and some - the ideal investor tuned in, or even a sponsor, tuned in right now and all they could hear you say was what the couple, three sentences you're going to say now right before the end of the show, what would you want them to hear?

 

Alan Donenfeld: Sure. Well we're an online investment marketplace where we're looking after our investors interests by pooling the investors together and we're somewhat like a co-op getting the best investment terms in the best investment deals. We're looking after our investors and I think it's a great marketplace. Our investors love what we're doing and they're investing and co-investing in deal after deal.

 

Adam Gower: Alan Donenfeld. What is your title? Founder? What is your title over there at CityVest?

 

Alan Donenfeld: I'm the Founder and CEO of CityVest. In fact, I have about 40 years experience. I was planning on retiring after I ran a hedge fund for about 12 years and I was thinking about moving to Florida. Changed my mind when my brother said he had some bad real estate investments through other crowdfunded sites and created CityVest to  find the best deals for my brother and other investors.

 

Adam Gower: Perfect. We're going to move right on now to talking about the origins of CityVest. Alan Donenfeld. Thank you so much for - from CityVest. Thank you so much for telling us all about your fund but such a pleasure meeting you today.

 

Alan Donenfeld: Oh it was great to be here and explaining what we do and hopefully we keep finding great deals for investors. That's kind of my passion is finding the next best deal and doing right by our investors.